Week in Review: Stocks Breakout On Shortened Holiday Week

The Bulls Are In Control 05.30.14

The bulls emerged victorious on the shortened holiday week after quelling the bearish pressure and sending the benchmark S&P 500 (SPX) to a fresh record high. Earlier this year, we wrote about how the market was in the process of building a large top and noted that we needed the top to be confirmed otherwise it would be a large base within a broader uptrend. Now that the SPX broke out, the latter scenario has occurred and the bulls are back in control as long as the SPX continues trading above 1897 (resistance should now become support). At its deepest this year, the S&P 500 only fell -6% below its record high which is impressive. In fact, we have not had a 10% pullback in the benchmark S&P 500 in two years which speaks volumes to how strong this market is right now. After last year’s 29% rally, the SPX built a new 5.5-month base which is very healthy action. It is also encouraging to see the weakest areas of the market (Biotechs, Growth, and momentum stocks) bounce and turn higher in recent weeks.

MON-WED: SPX Breaks Out

US markets were closed on Monday in observance of the Memorial Day Holiday. Overseas stock markets rallied sharply on Monday, following Friday’s healthy action on Wall Street. This set a bullish stage for stocks to rally on Tuesday. Stocks finished broadly higher on Tuesday, with the S&P 500 hitting a new record, as investors cheered a flurry of better-than-expected economic reports and the latest round of M&A activity was announced. Economic data was mostly positive- Durable goods, good made to last at least 3 years, unexpectedly rose +0.8% in April, beating estimates for a loss of 0.7%. Looking at the housing market, the S&P/Case-Shiller’s composite index of 20 metropolitan areas rose +0.9% in March, beating estimates for a gain of +0.7%. Finally, consumer confidence rose to 83 in May, matching estimates.

Stocks slid on Wednesday as investors digested Tuesday’s strong rally and waited for Q1 GDP to be announced on Thursday. The benchmark Treasury yield fell to lows not seen since last summer which goes in the face of common wisdom (rates “should” go up, not down, because the Fed will raise rates next year).

THURS-FRI: STRONG ACTION CONTINUES

Stocks enjoyed healthy gains on Thursday even after the latest round of economic data largely missed estimates. Before Thursday’s open, The Commerce Department said gross domestic product (GDP) slid by a -1% annualized rate in Q1 2014, missing estimates for a decline of -0.4%. Pending home sales rose by only 0.4%, missing estimates for a 1% gain. On a more positive note, jobless claims slid by 27k. Meanwhile, the S&P 500 (SPX) hit a fresh record high. The obvious question is: Why would stocks rally if the economy is literally contracting? The single most important driver of this 5-year bull market has been easy money from global central banks. So stocks rallied because weaker economic data will (hopefully) cause the Fed to err on the side of maintaining an accommodative (a.k.a. easy money) stance. This reiterates what we have been saying for the past few years, the primary factor of this 5 year bull market has been easy money from the Fed. Don’t take my word for it, just look at the facts (chart here). When QE 1 ended the S&P 500 fell -17% and when QE 2 ended, it promptly fell -21%. What do you think will happen when QE 3 ends? If GDP fell 1% with the Fed printing billions of dollars everyday to stimulate both Main St & Wall St, the real question is what will happen when QE 3 ends? There are two outcomes: either the patient (economy) can stand on its own two feet and grow when the meds are taken away (QE ends) or the Fed will announce another round of QE and give the patient more time to “heal”….As always, we’ll let the market decide. Stocks were quiet on Friday as traders closed out the month.

MARKET OUTLOOK: Don’t Fight The Tape

The bulls want to see the other popular indexes (Nasdaq, Russell 2000, etc) rally and hit new highs. Keep in mind that this bull market is aging (turned 5 in March 2014 and the last two major bull markets ended shortly after their 5th anniversary; 1994-March 2000 & Oct 2002-Oct 2007) but until we see signs of distribution (heavy selling) the market deserves the bullish benefit of the doubt. We get in trouble anytime we try to fight the tape. The path of least resistance is higher, until technical areas of support are definitively breached. As always, keep your losses small and never argue with the tape.

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S&P 500 Breaks Out To A New All-Time High:

SPX- Breakout-

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